The good news, if you can call it that, is that the companies who manage to weather the economic downturn will likely be able to make up for some of their pension shortfalls as the market returns and the value of the assets in their plans increases. “If there’s a strong company attached to the pension plan, then it’s probably not a crisis,” says Forestell. “The plans will get funded over time and pensions will continue to get paid.”
Finance Minister Jim Flaherty last week unveiled Ottawa’s long-awaited response to the pension crisis a month ahead of schedule, an apparent effort to quiet the growing calls for action. The cornerstone of the plan is a proposed change to tax laws so provincially and federally regulated companies can run pension surpluses during bountiful years, providing a bigger financial cushion when times are lean. At present, companies are capped at running 10 per cent surpluses in an effort to limit the revenue Ottawa loses on tax-deferred pension contributions. Under Flaherty’s plan, the cap would be raised to 25 per cent. Critics, however, are quick to point out that few, if any, companies are currently running pension surpluses, making the proposed changes meaningless in the near term. There was also some tinkering with federal pension rules, but they only apply to a tiny fraction of the country’s private sector plans.
Despite the calls from Nortel employees, Ottawa stopped well short of suggesting legislative changes to protect pensioners in the event of a corporate bankruptcy. While Liberal Leader Michael Ignatieff has said employees deserve to be near the front of the line as an insolvent company’s assets are being carved up, experts argue such a move could displace other creditors and, in turn, make it difficult for frail companies to raise badly needed financing, potentially forcing more bankruptcy proceedings. In short, pensioners may never be guaranteed a soft landing when their employer goes belly up.
“It’s a very complex issue, with cross-border jurisdictions and emotions,” says MP Ted Menzies, who is Flaherty’s point man on the pension issue. He suggests the intention is simply to improve the existing system, which Mercer ranked fourth in the world in a recent study. “We don’t want to throw out the baby with the bathwater,” he says. “We’ve got a good system. The question is how we make it better.”
Suffice it to say, the temporary fixes and promised reforms have so far done little to ease workers’ anxieties. In Air Canada’s case, the choices being offered to workers like Seto are downright scary: either let the company temporarily pull back its funding of the pension, or the airline dies. And he is one of the lucky ones. What about the estimated 60 per cent of Canadian workers who don’t have a pension at all?
Some say drastic action is needed. While Canadian workers who have contributed to the CPP are guaranteed a minimum level of retirement income, the mandatory employee and employer program only aims to provide about 25 per cent of an average worker’s wage, or about $11,000 in 2009. The rest is supposed to be augmented by registered retirement savings plans, or RRSPs, and private sector plans. Yet, nearly 11 million working Canadians have no access to private pension plans since most are provided only by large corporations. At the same time, many of us lack enough discipline to save sufficient money for our golden years, raising questions about whether the government should do more to fill in the gaps.
One possible solution has been brought forward by the head of the CPP’s investment board, David Denison. He has proposed that the CPP model could either be expanded by adding a supplemental pension benefit that would require increased contributions in exchange for more retirement income, or used as a blueprint for new mandatory or “opt-out only” plans targeting workers with no company pensions. Others have suggested the creation of multi-employer plans that allow smaller businesses to pool their resources and share the risk associated with setting up and maintaining a plan.
Governments may also be able to take measures to slow the stampede of private companies away from defined-benefit pension programs, which are generally viewed as offering more retirement security for employees because they guarantee benefit levels, but are more risky for employers because they’re on the hook if the plan doesn’t perform well. Defined contribution plans, by contrast, pass the risks along to employees by having them select from a basket of funds chosen by the plan’s sponsor, usually the employer. Defined contribution plans have been criticized for essentially leaving people’s retirement security exposed to the ups and downs of the markets.
An oft-touted middle ground solution is hybrid pension models. That includes so-called “target benefit” plans, where employers and employees agree on certain benefit levels that appear easily achievable, but which can later be adjusted based on actual investment performance. If the fund performs badly, benefits may have to be lowered. If it does well, they can be increased. Unlike defined contribution programs, such plans allow assets to be pooled and managed professionally, which is similar to the way defined benefit plans are operated. The hitch is that target benefit plans are more complicated for employers to operate and existing plans couldn’t be easily converted. Federal and provincial tax laws governing pensions would likely need to be changed in order to encourage widespread adoption.
A key challenge in realizing any reform will be overcoming the patchwork of provincial and federal rules that govern the pension industry. As head of the leading advocacy organization for pension reform, Perkins says he hopes Ottawa’s proposed changes to federal pension rules will light a fire under the provinces, several of which have already conducted extensive studies on the issue, but have so far failed to introduce changes. The main problems facing the system, he says, continue to be a lack of private sector coverage and the adequacy of private sector plans in general, but “having said that, there’s lots of ideas floating around out there.”
In the absence of any meaningful reform, current and would-be pensioners will continue to find themselves on shifting ground when it comes to old age security. Seto, for one, isn’t holding out much hope that his Air Canada pension will deliver what it promised. Like many employees at troubled companies, he blames his predicament on executives for making bad corporate decisions and mismanagement. But he also says he feels betrayed by a federal government that held him and his colleagues accountable for years in the heavily regulated airline industry. “What the government has done is drop the ball on the whole situation—they aren’t making sure the pension plans are being taken care of.”
People like Seto are hoping someone comes up with a solution, but it’s becoming increasingly clear that if you have any hope of one day retiring comfortably, you’d better start saving soon.
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